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American Retirement Association Comments on IRS Priority Guidance Plan

The American Retirement Association (ARA) on June 7 submitted a comment letter to the IRS on the retirement benefits-related items on its priority guidance plan for 2016-2017. The IRS in Notice 2016-26 had invited such comments.

The ARA says that it believes that “each and every” one of those items are “important to provide clarity and guidance to sponsors of retirement plans and the professionals who assist them.” The ARA also says that it recognizes “that the IRS and the Department of the Treasury have limited resources and that pending guidance projects must be prioritized as a practical matter.”

The ARA listed 15 retirement benefits-related items it believes it is especially important that the IRS pursue in 2016-2017. It notes that half of them were listed by the IRS in previous priority guidance plans and recommends that the IRS retain them as priorities for 2016-2017.

The 15 items, which the ARA lists in order of importance to ARA members, are as follows:

QNECs and QMACs. The ARA requests that the IRS issue guidance permitting the use of forfeitures to fund Qualified Non-Elective Contributions (QNECs), Qualified Matching Contributions (QMACs) and Safe Harbor Contributions under Code Section 401(k)(12) and 403(b)(A)(i). “The issuance of clarifying guidance sanctioning the use of forfeitures in this way would be consistent with the Code provisions and further encourage employer adoption and retention of 401(k) retirement plans. ARA believes the existing regulations could be interpreted to reach this result,” says the letter.

Substantiation of Hardship Distributions. The ARA recommends that the IRS provide official guidance on the recordkeeping requirements that plan sponsors must satisfy to properly document hardship distributions. “The IRS has emphasized that even where a third party administrator handles participant transactions, the plan sponsor is still ultimately responsible for the proper administration of the retirement plan. Ensuring that plan sponsors have sufficient information regarding these requirements is critical to ensure compliance. Equally important is providing transitional relief with regard to application of any revised standards in light of anecdotal evidence suggesting there is much confusion with regard to the applicable requirements,” the ARA says.

Governmental Plans. The ARA recommends that the IRS publish long-awaited guidance on the definition of a governmental plan under Code Section 414(d).

Interim Amendments. The ARA recommends that the IRS update and improve Revenue Procedure 2007-44 and the interim amendment process. “Although well intentioned, the current interim amendment process is expensive, time consuming, and increases the burden of plan sponsorship, all of which are felt disproportionately by small plans,” says the ARA, adding that “the burdens of the current process are exacerbated by the varying deadlines and accompanying uncertainty as to when interim amendments are required and the specific issues that must be addressed.

Update and Expand EPCRS. The ARA notes that, “One area of particular concern to plan sponsors and practitioners is guidance regarding the failure to timely distribute safe harbor notices required under Code sections 401(k)(12)(D) and 401(k)(13)(E),” and “recommends that the IRS continue to improve and expand the program, particularly for overpayments, as outlined in a recent comment letter; plan loan failures, as outlined in an earlier comment letter; and for certain 403(b) plan issues.”

Guidance regarding the aggregation rules for affiliated service groups under Code Section 414(m). The ARA says that such guidance “is particularly important because these provisions impact the compliance of not only of retirement plans, but also of health plans under the Affordable Care Act” and that it “will significantly reduce issues relevant to many retirement plan sponsors and practitioners and will promote sound tax administration in both the retirement plan and health plan contexts.”

Lifetime Income Guidance. The ARA argues that such guidance “helps address certain open tax issues such as nondiscrimination testing (benefits, rights and features) and the application of the QJSA/QPSA requirements to lifetime income products to put them on an equal footing with other types of investment products.”

Pre-Approved Plans for Cash Balance and Employee Stock Ownership Plans (ESOPs). The ARA suggests that the IRS officially expand the pre-approved plan document program to permit pre-approved cash balance plan and ESOP documents and extend the submission deadline for pre-approved defined benefit plans to a date that is at least 5 months after the issuance of the listing of required modifications (LRMs) or other IRS guidance regarding the parameters for pre-approved cash balance plans.

Merger and Acquisition Issues. The ARA recommends that the IRS address issues that result from mergers and acquisitions affecting 401(k) and 403(b) plans (including the treatment of safe harbor plans), the determination of highly compensated employees and the determination of year of service credit, as well as mergers and transfers between 401(a) and 403(b) plans.

Update Revenue Procedure 2000-40. The ARA recommends that the IRS make it a priority to issue guidance on:

  • approval of a chance in valuation date;

  • a change in method from fair market value to an asset averaging method; and

  • a change from one set of segment rates to another or between segment rates and the full yield curve.

Vesting of Terminated Participants. The ARA recommends that the IRS address whether participants who are terminated and paid during the last 5 years before a plan termination occurs should or should not be fully vested.

Retirement Plan Deadlines. The ARA recommends that the IRS provide guidance on which retirement plan deadlines are extended when a deadline falls on a weekend or holiday.

Expenses Included in Target Normal Cost. The ARA suggests that the IRS provide guidance on what pension plan expenses are and are not to be included.

High 25 Rule. The ARA argues that such guidance is especially important in the following instances:

  • when a plan covers only highly compensated employees;

  • to coordinate the use of certain terms under this rule with those used in Code Section 430; and

  • to review the restrictions under this rules in light of Code Section 436 benefit restrictions.

Reduce Regulatory Burdens. The ARA recommends that the IRS revise existing regulations in order to support innovation and reduce the retirement plan system’s administrative burdens.

The ARA says that it believes that guidance for each of these items “Will resolve significant issues relevant to many retirement plan sponsors and practitioners (not just a small group); will promote sound tax administration by helping plan sponsors and practitioners to maintain retirement plans in compliance with tax code qualification rules; and can be drafted in a manner that can be easily understood and applied by plan sponsors and practitioners.”